Pimco to back Novo Banco debt deal at Friday vote - source

Reuters Staff

3 Min Read

* Holders of short-dated bonds likely to back vote - source

* Holders of longer-dated debt could scupper deal - source

By Simon Jessop, Andrei Khalip and Christopher Spink

LONDON/LISBON, Sept 27 (Reuters) - Major Novo Banco bondholder Pimco plans to support a restructuring deal at the state-rescued Portuguese lender in a vote this Friday, though the bank could still struggle to get the necessary backing, a source familiar with the matter said.

The agreed sale of Novo Banco to U.S. fund Lone Star hinges on investors agreeing to sell back bonds at a discount in the so-called liability management exercise (LME) that runs until Monday.

Novo Banco was the “good bank” carved out of the remains of Banco Espirito Santo (BES) in 2014, which collapsed under a mountain of bad debt.

Ratings agency Moody’s warned last week a failure of the sale to Lone Star could lead to higher losses for senior bondholders than the LME itself.

Pimco and other holders of Novo Banco’s shorter-term debt are now likely to accept the deal after months of wrangling.

“When the terms came out, I think, in principle, most of the people in the front-end bonds were reasonably pleased,” the source said, speaking on condition of anonymity.

Another source said Pimco had enough bonds and clout with other bondholders to block the LME.

Pimco’s support for the deal has no bearing on a lawsuit it and other asset managers have launched over losses of some 2 billion euros on bonds transferred from Novo Banco back to the failed lender BES.

A spokeswoman for Pimco declined to comment when contacted by Reuters.

Holders of the longer-dated debt, however, are less inclined to agree to the deal as the terms offered to them are not as attractive, the first source said.

“There’s still a question mark (on the vote passing). There are a lot of retail guys in the long-dated bonds, so I guess those guys may be more inclined to participate, but I don’t know about the hedge funds in there; it’s less obvious for them.”

If the vote fails to get 75 percent backing from bondholders, options could include accepting a lower level of participation and asking bondholders or others to put new equity into the bank or winding it down, the source said.

“(This) would be kind of crazy, but it’s also possible ... sometimes those decisions can be arbitrary and not impossible, in Europe.” (Additional reporting by Axel Bugge in Lisbon; Editing by Rachel Armstrong and Mark Potter)